Key takeaways:
- Initial results of China's innovation-driven transformation, coupled with supportive policies have positively impacted the economy.
- The A-share market is experiencing ample liquidity, primarily driven by active institutional investors.
- As the wealth effect from equities strengthens, households shifting funds from low-interest bank deposits to higher-yielding stock market assets could mark a potential shift of excess savings to equities.
- China market continues to offer opportunities in sectors like new consumption, electronic vehicles, technology innovation and robotic automation.
Drivers of China’s rebound
China’s equity market rebound has been driven by policy shifts, artificial intelligence (AI) development with its ‘DeepSeek moment’, and liquidity. While investors were busy parsing China’s economic data to assess its fundamentals, the equity market rallied from September lows with some small-mid cap and innovative technology companies, and the Hang Seng index gaining about 30 per cent year-to-date.
The Chinese government’s resolve to pull the economy out of deflation is demonstrated by a policy shift to support quality growth. Supply-side reforms include its ‘anti-involution’ campaign focusing on measures to cut production capacity and curb disorderly price competition. Demand-boosting stimuli consist of household subsidies to lift the consumer goods and other services sectors.
China’s ‘DeepSeek moment’ with the unveiling of its low-cost AI model put paid to investors’ concerns over its ability to compete with global companies in AI or other technology-related sectors after its decoupling from the US. Alibaba’s unveiling of new AI technologies and other developments in biotechnology and robotics automation are other examples of specific idiosyncratic reasons that have spurred the market’s rebound.
In addition, the rally has been fuelled by liquidity with institutional investors now increasingly active and representing the primary source of incremental capital in the domestic A-share market. Since the second half of 2024, insurance funds have also scaled up both their A-share exposure and overall equities allocation in a bid to boost returns.
Disparity in offshore rally while domestic market lagged
The broad China market rally has been led by the H-share Hong Kong-listed mainland China stocks. One of the key factors for this boost has been the Southbound China Stock Connect scheme that allows qualified mainland Chinese investors to purchase eligible H-shares. While foreign non-Chinese investors still hold the bulk of H-shares, the marginal increase in demand has been the liquidity fuelling the offshore market rally.
However, the domestic A-share market has been catching up significantly from the second and third quarter of this year, boosted by policies that support consumption and the anti-‘involution’ campaign, which largely impact onshore companies. Adding to these positive developments, fundamentals are also improving with first quarter earnings of MSCI China corporates broadly meeting market expectations for the first time in over four years. While the A-share onshore companies are still lagging, they have narrowed the earnings-expectation gap.
At the same time, retail investors have not yet entered the equity market on a large scale. With deposit renewals becoming less attractive in a low-interest rate environment, households are prompted to seek higher-yielding assets. As the wealth effect from equities strengthens, households’ potential shift of their ‘excess savings’ into the domestic market could give it an added boost. These reasons underpin our optimism that the A-share market will continue to catch up with their offshore peers.
Themes and sectors offering diverse opportunities
From a thematic perspective, our portfolio managers are focusing on AI, robotics, and automation in the manufacturing sector as key growth-oriented opportunities.
Dividend stocks have also performed well, with H-shares outperforming A-shares, driven by the more attractive dividend yield as H-shares are yielding about 7 per cent at an index level compared to A-shares’ 4.5 per cent. Significant insurance money has flowed into the equity market, especially buying banks that are listed offshore that trade at a discount to their onshore counterparts.
In the new consumer space, younger generations seeking unique experiences are thronging character-based entertainment store Pop Mart and the sector has moved beyond traditional products like baijiu or hard liquor. While some valuations appear stretched, this sector continues to offer opportunities. Other interesting sectors include electronic vehicles, technology innovation and industrials.
Overall, China is shifting from rapid GDP growth to a focus on quality growth, with policies encouraging dividends and shareholder returns, supporting a ‘slow bull’ or long-term, steady growth market outlook.
